A firm operating at 75% capacity utilisation produces 60,000 units a year. Calculate its maximum possible output.

Maximum possible output is 60,000 ÷ 0.75 = 80,000 units a year.

Why does higher capacity utilisation lower average cost?

Fixed costs such as rent, machinery and management do not change with output, so producing more units spreads them further and the fixed cost per unit falls.

A firm has fixed costs of £600,000 a year. Calculate the fixed cost per unit at outputs of 30,000 and 50,000 units.

Fixed cost per unit is £20 at 30,000 units and £12 at 50,000 units.

Edexcel A-Level Economics B 9EB0

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Economic Factors in Business Expansion

Raising capacity utilisation

3 things to know
Papers 2 and 3

Overview

Capacity utilisation and its formula, calculating utilisation and maximum output, lower average cost at higher utilisation and fixed cost per unit, export orders and offsetting seasonal demand, the problems of near-full capacity, spare capacity, low utilisation and competitiveness, raising utilisation without more sales, rationalisation, and fast-growing export demand.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Define capacity utilisation.

Numbers

State the formula for capacity utilisation.

Numbers

A factory can make 40,000 units a month and currently makes 34,000. Calculate its capacity utilisation.

Questions from this subtopic

Each one with the model answer underneath.

1
Define capacity utilisation.
Model answer
Capacity utilisation is the proportion of a firm's maximum possible output that it is actually producing, expressed as a percentage.
2
State the formula for capacity utilisation.
Model answer
Capacity utilisation = (actual output ÷ maximum possible output) × 100.
3
A factory can make 40,000 units a month and currently makes 34,000. Calculate its capacity utilisation.
Model answer
Capacity utilisation is (34,000 ÷ 40,000) × 100 = 85%.
4
A firm operating at 75% capacity utilisation produces 60,000 units a year. Calculate its maximum possible output.
Model answer
Maximum possible output is 60,000 ÷ 0.75 = 80,000 units a year.
5
Why does higher capacity utilisation lower average cost?
Model answer
Fixed costs such as rent, machinery and management do not change with output, so producing more units spreads them further and the fixed cost per unit falls.
6
A firm has fixed costs of £600,000 a year. Calculate the fixed cost per unit at outputs of 30,000 and 50,000 units.
Model answer
Fixed cost per unit is £20 at 30,000 units and £12 at 50,000 units.

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